? Digital TPAs excel in the economics of new products. Not only can they get a product up and running in a short amount of time (6-9 months) compared to most insurance companies, but they can also dramatically reduce steady-state cost. Insurance companies leverage a “pay-by-the-drink” model that puts the risk and onus on TPAs to vary their steady-state cost and run efficient operations.
Many tech companies believe the millennial generation will transform the insurance industry as their insurance needs intensify. Millennials are expected to represent 50 percent of global consumption by the end of 2017. Trov, the first global on-demand insurance platform fills this need by offering to insure any item anywhere in the world via a mobile phone. The company raised $45 million in April 2017 from strategic investors, and now has roughly $90 million for global expansion efforts.
M&A Trends
According to the “Pulse of Fintech” report published jointly by KPMG International and CB Insights, total global fintech funding was US$8.2 billion in Q3’17, well above the $6.3 billion raised in Q3’16.
The insurance market is mature and highly competitive, with limited growth opportunities. As a result, carriers are among three sets of buyers (including brokers and private equity) fueling a hot M&A environment for specialized managing general agencies. Some of these MGA acquisition targets have gone for high-teens multiples of EBITDA—surpassing the historical range of 8-to-12-times valuations.
Acquisitions to increase vertical integration and distribution
While brokers are the most active buyers, insurance carriers continue to seek vertical integration and value MGAs’ specialist product and geographic expertise and distribution. MGA deals with carriers allow insurance companies to grow strategically and diversify with lower execution risk and costs.
MGA-produced business accounts for a growing share of both commercial and personal lines offered by an increasingly large number of insurers. Insurers and reinsurers are attracted to MGAs because they provide underwriting expertise and access to specialty business that may be difficult to reach. Private equity firms are currently more interested in investing in distribution via MGAs than in balance sheet companies.
Large incumbents flush with cash, looking for acquisitions & strategic investments
The insurance industry did not experience the capital issues that the lending, investment and banking sectors faced during the financial crisis. As a group, property/casualty insurers in the U.S. are not distressed or in need of immediate change to dramatically improve their financial position. Even after the 2017 natural disasters, surplus levels are expected to remain strong.
(1) Source(s): National Association of Insurance Commissioners, SNL Financial
Carriers want to protect their cash position for growth or to return capital back to shareholders. Incumbents are looking to maintain their significant market share while using any spare capital to acquire technologies that would allow them to improve efficiency and develop new customizable insurance products. Taking the inorganic route, incumbents could acquire proven companies who have technology they desire, rather than risk building out the capabilities internally.